The observation of "Lies, dammed lies and statistics" is often attributed to former British Prime Minister Benjamin Disraeli.

His words must be reverberating around any serious observers of government and banking statistics.

The horrors of the subprime mortgage crisis, of which I have warned for many months, is now bursting through the creative accounting of some of our major banks and our government.

By strange coincidence, this day (Nov. 5, as the hidden skeletons of Citigroup explode upon us) is celebrated as "Guy Fawkes Day" in Great Britain. On Nov. 5, 1605 a plot to blow up King James I and his entire Parliament was discovered. It is still commemorated nationwide with fireworks.

Today, we see the dawning of what will likely prove to be a juggernaut of realism leading to massive write downs at major financial institutions.

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To give some idea of the problem, Citi has now begrudgingly announced they may have to write off between $14 billion and $18 billion — soon you're talking real money! And, according to CNBC, that's discounting their subprime investments by an astonishingly sanguine 20 percent! Forty percent to 50 percent would be more realistic, considering the real estate crash now underway.

In 2008, the new, post-Enron accounting rules come into force. Astonishingly, in this modern world of con-men executives, the new rules will force banks and financial institutions to actually tell the truth concerning the valuation of their collateralized debt obligation (CDO) and structured investment vehicle (SIV) derivatives.

This may seem strange in our modern world, where corporate and bank executives have followed our politicians in making honesty a rarity indeed.

Worst of all, Citi is not alone. The new rules will force other banks to come clean.

For example, I understand that several banks face massive estimated asset write downs to be on the same footing as Citi. They will include JP Morgan ($48 billion); HSBC ($30 billion); Wachovia ($10 billion) and Bank of America ($6 billion)!

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After reading those huge amounts, you will begin to realize why, despite massive efforts by the Fed — $41 billion injected Nov. 1 alone — our inter-bank lending system is in disarray.

No wonder our government has allowed the continued abuse of off-balance sheet (so-called) accounting.

Indeed, our Treasury recently worked on what they called a "Master Liquidity Enhancement Conduit (M-LEC) Scheme. (Note the unabashed use of the words "enhancement" and "scheme"!)

This is an official parking facility to protect member banks from declaring the true market value of their mortgage-related SIVs and CDOs. Talk about "sieves"! If we, as tax-paying citizens and small businesses, did such a thing, we'd be in jail!

Worse still, this does not include foreign banks.

We understand that the problems at Northern Rock (sources say as much as $43 billion) are far from over and are now a priority issue for Prime Minister Gordon Brown.

The Frankfurter Allgemeine reports Josef Ackerman, the chairman of Deutsche Bank, estimates total global losses in subprime at $150 billion to $250 billion!

This pervasive attitude of "creative accounting" stems from the top of government.

It is sad commentary that our politicians regularly lie to us.

Iraq is a classic example: Despite the Iraq war costing thousands of gallons of the best of American blood, $1 trillion in cash and a major loss in our international credibility, few of us feel that we have been given the true reason for our pre-emptive invasion.

We have long alerted readers to the "politically cooked" inflation figures, biased heavily to the downside.

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I wonder how many readers, looking at their increased expenditures on heating, gasoline, health insurance, food and travel, can honestly believe our inflation (as expressed by the CPI) is just two percent!

We believe, calculated on our government's pre-Clinton basis, our true inflation rate is running at 6 percent to 8 percent!

We pointed to reduced debt and Social Security costs as key political advantages of a downwardly biased CPI.

Believing this, we had pushed for higher Fed rates, to kill inflation, and defend a strong dollar.

Now, however, I see another government "trick" — the false boosting of our economic growth rate (GDP).

As we all know, nominal GDP is discounted by an inflation "deflator" to ensure that inflation does not boost the figure falsely.

However, if our CPI inflation figure is falsely low, it will under-deflate the GDP!

Chart 1 shows our GDP to have been in a contraction trend.

Click for Larger Image

But, if our inflation rate is too low, the published GDP in the chart is too high.

So, it is quite probable that we are already in recession.

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Meanwhile, our government says our economy is strong and growing at 3.9 percent, when it is likely in a deepening recession.

While calling for a strong dollar, our government is clearly engaged in a competitive devaluation, hoping increased exports will avoid recession.

It is becoming increasingly clear that false statistics have encouraged our Fed to keep rates too high, if it intends to avoid a deep recession and an economic meltdown.

Next, we will deal with the false interpretation of statistics by Wall Street's cheerleaders.

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